Minimum Wage Cuts: What Are Economists Really Arguing About Here?

Andrew Gelman peers into the land of economists from the land of statisticians and wonders why everyone is arguing over a policy that will never ever happen. It probably looks a little like listening to two cancer doctors argue over whether we could cure a poisonous bite from an alien. “What?!? Why are you arguing about that? Don’t you have cancers to cure?”

I think I can help explain some of the underlying impulsion going on here. I apologize in advance for the gross generalizations that follow.

Libertarian economists who are arguing that decreasing the minimum wage would increase unemployment want a cudgel with which to bash liberal economists who are arguing for a variety of fiscal stimulus. This puts liberals into the position of either accepting that the minimum wage should be cut -and ooh that stings to a liberal!- or admitting that their primary goal isn’t really creating jobs, but rather promoting progressive policies (this is the secret suspicion of libertarians everywhere). This would be a bitter pill to swallow for liberals, and they would hate to give libertarians that satisfaction, so they are fighting back tooth-and-nail, declaring “when you’re in a liquidity trap if prices go down quantity goes down too, and then the sun turns into a supernova!”

Let me put the phenomenon in a general framework: it’s gratifying to believe that your own group has the solution to a problem, but the ideology of the other group is getting in the way, especially when the other group is promoting their own solutions to the problem that conform with their ideology but are aggravating to your ideology.

This is why libertarian economists LOVE arguing about carbon taxes with environmentalists; to economists the solution to global warming is simple, and it does not involve micromanagement, moralizing, and making a lifestyle out of environmentalism- things the libertarian minded economist does not like. So environmentalists must either accept that economists have a solution that is better than all of the other policies and behaviors environmentalists spend so much of their time arguing for, or admit the environment really isn’t their primary concern. That is satisfying to the economist.

But there’s also something going on with economists, a phenomenon I recognize wearing my other hat: the tendency to place excessive weight on issues where professional judgment differs from lay opinion.

The classic example is free trade versus protectionism. Economists are justly proud of the close reasoning that produced the classical case for free trade, and love to skewer dumb protectionist arguments. I’ve done it myself.

But all too often, economists then become like the little boy with a hammer, to whom everything looks like a nail. Because protectionism is an issue on which they believe they have some special insight, they inflate its importance, and make free trade versus protectionism THE crucial issue in economic policy — which it isn’t.

So I think that’s part of the motivation. The other part is that it is fun to argue about these things, and flex your fundamental economic-theory-muscles. Notice none of the tools being used are very complicated; it’s elementary partial or general equilibrium analysis. Nor is the policy being debated something abstract or complicated to intuit; “what are the effects of the minimum wage in a recession?” is a fundamental topic. There’s a beauty in the simplicity of an argument as pure and fundamental as this when so much of what economists do and are trained to do is complex, abstract, and in pursuit of unintuitive goals like maximizing the utility of an infinitely lived representative agent. In a way that I can’t really explain, it’s a little like watching a lightsaber fight. Jedis spend their lives learning to be one with the universe, see the future, and becoming masters at piloting complicated flying machines, but in the end, all those deep and complex skills all get boiled down to a sword fight.

This is an excellent point. I am libertarianish, but I find the debate you’re talking about rather obnoxious because as far as I can tell (looking at review papers) the minimum wage seems to be relatively unimportant, it doesn’t do a good job of achieving liberal goals, but it doesn’t seem to have large harmfull effects either. It also seems to me that, as Cowen says, any effect on AD is likely to be pretty small.

Unemployment is high because demand for goods and services are depressed. Demand is depressed because of the large loss of wealth due to the collapse of the housing bubble and high 2008 energy prices that sucked the couch change out of consumer transportation budgets. No amount of lower wage will increase hiring because there is no demand for the goods and services the additional workers could provide. None.

So stop it.

Lowering the take home pay of minimum wage workers would lower demand even further. These workers would have to pay off past debt with deflated wages. It would be a race to the bottom.

This argument is being raised as a DISTRACTION from the need for a JOBS program. We should really be discussing JOBS and how to create JOBS and why a period of high unemployment is the cheapest time for governments to hire more workers that can supply unmet demand and create JOBS.

Libertarians create these distractions so they don’t have to face the failings of their juvenile ideology. Stop humoring the libertarians and get real.

No amount of lower wage will increase hiring because there is no demand for the goods and services the additional workers could provide. None.
Alex Tabarrok disagrees. But on the other hand, he’s a libertarian.

This is probably also the reason libertarians are avoiding the idea of reducing the work week in these debates which their arguments support but would consider anti-market. Sometimes people only want what they want and are willing to let the ends justify the means.

I think it’s reasonable for economists to argue about issues that might elucidate the underpinnings of their mental models, and — here I’m responding to that last Krugman quote — I think it’s commendable for economists to pipe up on issues they understand and to humbly acknowledge, in other situations, that they have no special insight and that their opinions deserve no more deference than those of anyone else.

Still, bakho, I mean, really, you think there is no employer anywhere who is thinking right now, “I’d maybe expand a little bit if my labor costs were lower”? I think you’re falling prey to an availability bias; even at the worst part of a deep recession, there are employers hiring workers and others laying workers off. When you say “there is no demand … None,” you are simply and egregiously wrong. There is, in aggregate, less demand for new labor than there would have been 3 years ago. And there is almost certainly some employer somewhere who would hire a $6.50/hour employee.

Wages are sticky. As such, it is doubtful that minimum wage workers would see their wages go down if the minimum wage was lowered. The effect would fall on new hires.

Therefore there would be no lessening of demand, far from it. There would though be a lessening of the deadweight loss that comes from preventing marginal workers who are unemployed from bargaining for a job. And since those marginal jobs come with output, there would be an increase in aggregate demand, which is what we really want.

Lowering, or better yet abolishing, the minimum wage is about as close to a free lunch as you can get. We shouldn’t stop there though; what the free lunch I’m talking about comes from is eliminating or reducing deadweight loss.

As for stimulating aggregate demand, I suggest checking out Scott Sumner’s blog. If you actually take the time to read it and try to understand it instead of foaming at the mouth every time you hear the word “libertarian”, then you might learn that the problem has been too much demand to hold money (i.e. low velocity of money), and that therefore this implies that the Fed has been asleep at the switch and has failed to create the supply to meet that demand. But don’t take my word for it; read the past year’s posts from Sumner and be enlightened. Here’s the link: